Flashcards in E2. Feldblum: Computing Taxable Income for the P&C Insurance Co. Deck (20):
Economic income equation
Economic income = PV (future premiums) - PV(future losses)
How is the discount rate to be used in tax calculated
For each AY, the discount rate is the 60mnth moving average of the "federal mid-term rates", ending Dec 1 of the prior AY
Portion of Tax exempt income that is taxed due to proration provision
Reason that tax calculations use Schedule P Part 1, instead of Part 3
-Part 3 contains only DCC, not AAO. Part 1 contains all LAE.
-Part 1 is audited, whereas Part 3 is not.
-Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment.
Equations to derive RTI from incurred losses according to direct and indirect methods
-Direct: Paid loss + change in discounted reserves
-Indirect: Statutory incurred loss - change in reserve discount.
Due to the DRD, what portion of dividends are tax exempt
-if the taxpayer owns less than 20% of the firm, 70%
-if the taxpayer owns between 20 and 80%, 80%
-if the taxpayer owns more than 80%, 100%
Equations to derive RTI from dividends according to direct and indirect methods.
-Direct: 40.5% of unaffiliated common stock dividends
-Indirect: Statutory income - 59.5% of dividends
Equations to derive RTI from bond income according to direct and indirect methods.
-Direct: 15% municipal bond income
-Indirect: Statutory income - 85% municipal bond income
AMTI = RTI + 0.75 Income that escapes taxation
Equations to derive RTI from revenue offset according to direct and indirect methods.
Direct: WP - 80% *Change in UEPR Indirect: Statutory EP + 20% *Change in UEPR
Factors that management need to consider when deciding portions of stocks versus bonds to hold:
-relative tax rates
-asset liability management
-Management dislike of erratic income
ARIT = RIT - prior year's minimum tax credit
Relationship between RTI and AMTI that would produce the optimal tax strategy:
AMTI = RTI*175%
Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels:
-Callability: most municipal bonds are callable
-Liquidity: Municipal bonds are less liquid.
-Tax legislation: The proration provision reduced the tax advantage of municipal bonds
Reduce taxable income?
Use company specific discounts if factors are closer to 1 because it imposes less discounts and higher incurred losses
Stat vs Tax incurred losses
Statutory: IL=paid losses + change in full value reserves
Tax: IL=paid loss + change in discounted reserves
Stat and Tax accounting loss occurrence
Tax: investment income on the assets backing the loss reserves offsets the amortization of the interest discount of the reserves
Statutory: earns positive investment income. No changes in reserves to offset this
Determining discounted rates
1. Undiscounted loss reserves
-from schedule P part 1
2. Discount rate promulgated each year by the treasury
-varies by AY
3. Loss payment pattern by LOB
-applies a CY payment pattern to an AY of loss reserves
The "2" or the "7"